By Christopher Maag
What happens when a city’s entire real estate market collapses, leaving only vultures behind?
A big, nasty fight ensues for the scraps.
Las Vegas, synonymous with gambling and vice, now has a new reputation: it’s the city where the housing bubble burst most spectacularly. One in 28 homes in Las Vegas were foreclosed upon in the first quarter of 2010, giving the city the highest foreclosure rate in the nation—one that is five times the national average, according to the Las Vegas Sun newspaper. The city now has one of the highest home vacancy rates in the nation, second only to Detroit, according to the U.S. Census Bureau.
That leaves few regular people buying houses in Las Vegas. Instead, the vast majority of home sales there involve investors looking to buy when the market is low and then sell at a profit, says Bill Uffelman, president of the Nevada Bankers Association.
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That normally simple process is made complicated by Nevada’s unique and vague real estate laws, which say that homeowner associations are entitled to nine months’ worth of unpaid fees after a home goes into foreclosure. The home’s new owner would be responsible for paying the HOA fees.
Does the law also force these new homeowners to pay collections agencies fees they incurred while trying to collect the unpaid debts, efforts that may have stretched back years before a home has gone into foreclosure?
Of course it does! That, at least, is what the collection companies say.
“These real estate speculators want to come in and make their profits and leave the neighbours paying all the bills,” says David Stone, president of Nevada Association Services, a collection company that serves only HOAs. “That’s not right, and the law recognises that.”
Of course it doesn’t! Or so say the investors, who are left to pay the fees, which add up to millions of dollars a year.
“The law is very clear,” says James Adams, an attorney and one of the investors involved in the fight. “If these collection agents want homebuyers to pay their fees, they are more than welcome to go to the legislature like anybody else and ask that the law be changed.”
Ever since it started last summer, the fight has been nasty and personal. Each side accuses the other of being heartless, money-grubbing jerks that are abusing the legal system and hurting regular homeowners.
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“They’re filing all these lawsuits, and it’s all nonsense,” Stone says of investors. “These people just want to make millions of dollars while everybody else suffers.”
“They’re breaking the law, and they know it,” Adams counters.
In fact, their mutual vitriol and antipathy might be the only thing the two sides share.
A Strange City
Las Vegas is a strange place to build a house. And it’s not just because swimming pools and grassy lawns make for weird additions to a desert. Most houses built in the city during the housing boom were constructed in planned subdivisions governed by homeowners associations (HOA’s). The associations are responsible for maintaining parks, playgrounds, pools and other amenities—work that is usually done by city governments. Today roughly half of all homes in Las Vegas are part of such communities, Uffelman says.
When the housing boom went bust in 2007 and 2008, homeowners associations experienced a double whammy. First, many homes were left vacant, depressing home values.
Second, many homeowners stopped paying their association dues. Associations were forced to reduce maintenance costs. It’s not uncommon to find entire subdivisions where the grass is knee-high because the associations can only afford to mow communal spaces once a month, Stone says.
“Many associations are really hurting,” says Gail Burks, president of the Nevada Fair Housing centre. “They depend on these fees.”
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A Strange Law
In most states, when a house goes into foreclosure the HOA is out of luck. Any fees the homeowner failed to pay before the foreclosure are simply wiped away, along with any other debts associated with the house.
In Nevada, the rules are different. Partly because the state has so many houses in HOA communities, state law gives HOA’s a “super-priority” lien, which means debts to an HOA are not wiped clean by a foreclosure. Instead, the associations are able to collect up to nine months’ worth of unpaid dues from the new owners.
“Everybody agrees that the homeowners’ associations should be paid,” Adams says.
A Simple Disagreement
But homeowners associations don’t collect their own back dues. Instead, they contract with debt collection firms to do it for them. That costs money. Local custom holds that the HOA’s don’t pay anything for the collection service. Rather, collection companies make all their money from fees they charge to homeowners.
It’s not uncommon for homeowners facing financial difficulty to go years without paying their association dues. A firm might spend thousands of dollars trying to collect on a long-term debt like that, says Steven Parker, president of RMI Inc., a collection firm.
That’s why the super-priority lien must include back dues as well as collection fees, the collectors say. The two are inextricably linked.
“You can say we shouldn’t charge collection fees. Fine,” Parker says. “Well then how do you expect the associations to collect them? It just doesn’t make any sense.”
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But collecting such fees is illegal, investors say, since the law makes no mention of them. Many investment companies have bought hundreds of houses each. Paying collection fees and HOA dues combined could cost some investors millions of dollars just to get a clear title and re-sell the homes. Such fees are “egregious, unscrupulous and unlawful” says Puoy Premsrirut, a Las Vegas lawyer and real estate investor who is heavily involved in the fight. It’s a “scheme over years perpetrated by NAS to defraud Nevada homeowners out of millions of dollars in unlawful collection fees,” Premsrirut says.
And because they can’t resell the houses until all liens are cleared, the investors liken collection fees to a form of extortion.
“We can’t sell the house until it has a clear title, and the collection agents are using that to force us to make these illegal payments,” Adams says.”That could scare lots of investors out of the market completely. And then there won’t be anybody left to buy these houses, fix them up, and try to find new owners for them. Where would the associations be then?”
No! We’re the Good Guys!
In addition to calling the other side names, both investors and debt collectors argue that they represent the best interests of regular homeowners. Without debt collectors HOA’s would have no mechanism for collecting unpaid dues, the collectors say. That deprives associations of money they desperately need to maintain their subdivisions, attract new homeowners, and hopefully escape the housing recession.
“These speculators want to come in here and make huge profits, and forget what happens in the neighbourhood. They don’t care,” says Stone, of Nevada Association Service. “If they’re unwilling to pay their fair share, everybody else in the community has to pay more.”
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Local homeowner advocates agree with collection agencies that investors should pay the fees. The HOA’s must be paid. And if the dues aren’t paid by investors, then existing neighbours who have done nothing wrong and stayed current on their mortgage payments are left to subsidise the investors by shouldering higher dues.
“In the end, the investors just have to pay,” says Burks.
Besides, Burks and the collectors argue, it’s not as if investors don’t know about the collection fees before they buy a house. The HOAs’ liens are disclosed during the purchase process.
“They’re acting like this is all a surprise, as if we’re trying to scam them,” says RMI’s Parker. “There’s no surprise here. These speculators know exactly what liens exist on every house before they buy it.”
Meanwhile, investors insist that by finding new owners for foreclosed houses, they play an important role in stabilizing HOA finances and catalyzing the recovery of the Las Vegas housing market. Charging them fees to collect debts they didn’t create isn’t just illegal, they argue—it’s counterproductive.
“They want to charge these fees not because it’s right, but because it’s convenient. Because they think the investors have the money to pay,” Adams says.
A Huge Mess
The argument began last fall with a lawsuit by Las Vegas-based attorney Puoy Premsrirut against a debt collection company for allegedly trying to collect illegal fees. Class-action lawsuits against multiple collection companies followed.
Investors asked the Financial Institutions Division to strike down the fees. Instead, the division set a cap of $1,950 for fees related to unpaid HOA dues. The cap satisfied some collection agents, including Stone. But it enraged others, who sued the division over the cap, upping the ante in the legal battle.
Meanwhile, the collectors filed a lawsuit against Premsrirut and other investors, alleging that their onslaught of lawsuits constituted an abuse of the legal system.
“All of their lawsuits have been struck own, and every time they lose they just file another one somewhere else,” Stone says. “It’s utterly ridiculous. They need to stop.”
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The allegation turns the investors nearly apoplectic.
“When is it an abuse of process to demand due process?” Premsrirut says.
The legal battles are likely to wind up before the Nevada Supreme Court, both sides agree. Meanwhile, investors, collection companies and HOA’s all are lobbying state legislators for bills that would alternatively revoke the cap, explicitly include collection fees in super-priority liens, or ban the fees altogether.
“Oh yes, it’s definitely complicated,” Burks says. “There’s a lot of money at stake, not to mention the future of these neighborhoods.”
Christopher Maag is a freelance journalist for publications including The New York Times, TIME magazine and Popular Mechanics. He graduated with honours from the Columbia University Graduate School of Journalism, and has worked as a staff writer for daily newspapers, monthly magazines, alt weeklies and websites. Maag writes about people with big dreams set on little stages, including a teenage girl who races jet-powered tractors, and people who make millions of dollars impersonating Barack Obama.